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Last updated 09:00 27/03/2014

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Political instability in Ukraine -coupled with potential freeze damage to winter wheat in the United States and a deepening drought in some major wheat producing countries - are conspiring to significantly drive up wheat prices, economists say.

US Wheat Associates, the industry's trade group, said in a recent report that concern over the political situation in Ukraine - which supplies 6 per cent of the world's wheat export market - was one of the factors for the price spikes.

Crimea accounted last year for about 7 per cent of Ukraine's grain exports. The Black Sea region is one of the world's major wheat producing areas, with Russian wheat alone accounting for almost 11 per cent of the world's export market.

But the group's market analyst, Casey Chumrau, also said in her report that weather worries were the primary fuel for a 15 per cent increase in wheat futures prices for hard red winter wheat during just 13 trading days at the Kansas City Board of Trade.

Droughts in some major wheat growing countries and potential freeze damage stemming from subzero temperatures that hit the US plains in January is now showing up.

"We are certainly not downplaying the political unrest," Chumrau said in a phone interview on Tuesday.

"There is potential for market disruption in the future, but at this point it is market speculation."

While the down-the-road effects of the higher prices on consumers is uncertain, US farmers are poised to cash in on the higher prices.

In January hard red winter wheat for May delivery on the commodity futures market was trading at US$6.05 ($7.04) a bushel. It is now fetching almost US$8 a bushel. (One bushel of wheat is 27 kilograms or 60 pounds).

Chumrau noted that recent reports from the Ukrainian Agriculture Ministry show no indication grain shipments have been affected so far.

A more pressing concern is drought in the Black Sea region, with parts of Russia and Ukraine reporting dry conditions this spring.

In four of the last six years, the world has had record wheat production and record wheat consumption, and there is still plenty of wheat around to meet that consumer demand, she said.

"Still the specter of potential conflict and upheaval in that part of the world is probably what is affecting at least the worries of the market, as much as the current actual impact," said Dan O'Brien, a specialist in grain markets at Kansas State University.

Both market analysts agree, however, that the drought conditions in the US southern plains is also a major driver in the recent uptick in wheat prices as winter wheat breaks dormancy and needs soil moisture to grow.

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"We have problems in the winter wheat belt," O'Brien said, adding there are reports about damage caused by the frigid temperatures in January, when there was little protective snow cover on the ground.

Rainfall has been sparse so far this spring.

About two-thirds of the US wheat belt - an area that includes Texas, Oklahoma, Kansas, eastern Colorado and west-central Nebraska - is in a drought, said Don Keeney, agricultural meteorologist with MDA Weather Services.

Although the outlook calls for some rain in the southern plains the first week in April, those are not expected to be heavy and will help crop conditions "only a little bit," he said.

Wheat is breaking dormancy across the plains, but cool temperatures have mostly slowed growth.

That is expected to change next week when it turns warmer and plant growth accelerates - but the crop then needs soil moisture or timely rains.

Given the weather outlook, Keeney anticipates crop conditions in the US wheat belt will deteriorate substantially during the first two weeks of April.

"As in the United States, the real concern for the new wheat crop in Ukraine and southern Russia is drought," Chumrau wrote.

"Once more, we are reminded that in the world wheat market, precipitation is always more important than politics."

- AP

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